Bill Coming Due?

The markets can remain irrational longer than you can remain solvent.  That’s supposedly a quote from Lord Keynes.  Still, we think it’s better to be rational than irrational, however that might pan out in the “markets”.

We’ve got a real problem on our hands.  It’s been a problem for decades and our rulers have more or less papered it over all that time and lived with the occasional “crisis”: 1980’s S&L crisis; 1987 stock market crash; 1990’s Asian currency crisis and Long Term Capital Management failure; stock market bubble pop of early 2000’s; real estate bubble pop of mid-2000’s; Lehman-capital markets crash of 2008, which included collapse of Washington Mutual, then the largest “savings and loan” in the US; the recent Greece crisis.

Has there been “stability”?  Of a kind, sure.  The 1% have consolidated their position on the top; the 99% have become ever more mired in their lesser status.  Social mobility used to be considered an important thing.  But never mind.

What I don’t get is that even Ambrose-Pritchard – probably the most insightful journalist in the world on this topic – never seems to straightforwardly get to the real point:  the fed’s rate raising’s most devastating consequence will be to the balance sheets of the institutions holding large amounts of low yield debt instruments, derivatives and whatnot.  Because as capital holdings their value will plummet dramatically with even small increases in the interest rates.  And then those institutions will have to be “bailed out” or they will fail, and the row of dominoes does its thing.  Only it’s no game.

So for this reason, we’re not even convinced that all the talk about rising interest rates means that’s going to happen.  It might be another bluff.

Besides all that, it would seem that one short term result of a rising interest rate environment is that there will be a spurt in borrowing: potential borrowers will finally understand that it might be cheaper to borrow today than tomorrow and go for it. One of the unintended consequences of 0% interest rates has been monetary stagnation, except through government borrowing.

We are surprised, of course, at how long the PTB have been able to kick the can down the road.  We thought it might all come crashing down years ago.  Fundamentally nothing has changed, though – that’s what kicking the can down the road means.

The solution is still a jubilee, and a jubilee is still going to happen one way or another:  in a lawful and orderly way, or in a violent and chaotic way.  The smart money is on the latter, we imagine.

But we hope it doesn’t work out that way.  For our own sake.  And others’.


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